~ Immigration Tax Planning ~
Tax Issues When Moving to the United States
Tax reduction is not evil if you do not do it evilly. Murphy Logging Co. v. United States, 378 F.2d 222 (1967).
Many foreign individuals are not familiar with the system of taxation imposed by the United States on its citizens and residents. When these individuals move to the United States, they are often unpleasantly surprised by the long arm of the U.S. tax collector. Unfortunately, by the time they discover how the system works, they have already taken up U.S. residence and the ability to redirect their income is significantly reduced.
I can help potential immigrants understand the nature of the U.S. tax system and the steps they can take before they arrive in the United States to minimize their U.S. tax liability.
Background - Income Tax
Citizens and residents (as defined for tax purposes - which includes more than merely those who have been admitted for permanent residence/"green card" holders) of the United States pay federal income tax on their worldwide income. In addition, there are numerous anti-deferral and penalty tax regimes which apply to the undistributed income of foreign corporations.
This can come as a shock to those individuals who are more familiar with a territorial system of taxation in which a particular country imposes tax only on income which is earned within that country - and who may believe that their "offshore" income will always be exempt from income tax. Even more shocking is the impact when they are forced to pay tax on income earned by their offshore corporations, income which may never be distributed to the U.S. shareholder and which may create a severe cash-flow problem for the business if it must be removed from the corporation to pay U.S. taxes.
Background - Estate Tax
Generally, a person who is domiciled in the United States is subject to U.S. estate tax on all of their worldwide assets. Since the maximum estate tax rate is currently 55%, an unexpected death shortly after moving to the United States can quickly wipe out a substantial portion of a family's hard earned wealth, most or all of which may have been earned outside the United States before taking up U.S. residence. This sort of result is tragic and can be avoided with proper planning.
Background - Gift Tax
In addition to estate tax, persons who have a U.S. domicile are generally subject to gift tax on all gifts in excess of certain annual limits, regardless of the location of the property given. To the extent that the potential immigrant has relatives or favored charities that are located outside the United States, it is prudent to consider either avoiding U.S. domicile, or if this cannot be accomplished, placing some assets in a foreign trust to avoid future gift taxes.
Background - U.S. Social Security Taxes
Many immigrants, even those whose visas have relatively short time limits or who clearly do not intend to remain in the U.S. indefinitely, will be subject to U.S. Social Security taxes if they work while in the U.S. Blanket exemptions are generally available only to those on F, J, M or Q student or faculty visas, and only if the work relates to their teaching/learning program. The exemption extends only to the primary visa holder (the holder of the -1 visa), whereas children and spouses of such exempt persons (holder of -2 visas) are NOT also exempt. Holders of so-called "economic" visas such as E, H and L generally are subject to U.S. Social Security taxes. All of these rules are subject to modification under the treaty, if any, between the U.S. and the immigrant's country of citizenship. Under some of these treaties, it is possible to pay social insurance tax to the "home" country rather than to the U.S.
Solution
I can help potential immigrants arrange their affairs in ways that minimize subsequent exposure to U.S. tax jurisdiction. Common techniques include the use of trusts and reorganizations of foreign corporations to reduce the ownership attributed to the U.S. shareholders. The rules in this area are very complex, and it takes education and experience to prepare a structure that will avoid all or most of the burdensome reporting and tax-paying requirements.
I have the education and experience needed to properly advise potential immigrants regarding their U.S. tax planning. In light of the recent changes to U.S. tax treatment of foreign trusts, I urge all potential immigrants and their immigration attorneys to review their plans with knowledgeable tax counsel as soon as possible. Many of the "standard" tax structures for immigrants have been rendered worthless by the new laws, with effective dates retroactive back to February of 1995. Moreover, there are now "look-back" provisions which will unwind tax planning which is put in place up to 5 years before taking up U.S. residency. Immigrants with any significant amount of non-U.S. assets really cannot afford to forego careful tax planning before they arrive here. The difference in tax results can be astonishing.
Richard S. LeVine,
Esq.
157 Church Street, 19th Floor
New Haven, CT 06510
Tel: 203-789-1320 Fax: 203-785-8127
info@taxhoncho.com